Investors demand tax parity across public & private companies

Currently, there is no capital gains tax on share transactions in listed companies if those stocks are held for 12 months.ET Bureau | May 13, 2016, 07:41 IST

By Taslima Khan

While the venture capital industry in India cheered the government’s attempt to create tax parity between domestic and overseas investors via the recent amendments to the Mauritius tax treaty, a bigger worry in the startup investor community is a lack of tax parity between investors in startups and shares of publicly-listed companies, which is a major deterrent in opening up the vast pool of domestic capital waiting to find its way to venture funds and startups.

“There is an altogether different disparity that needs to be addressed. If public market investments face zero long-term tax, why should private companies which as per all data are creating more new jobs than any other sector face capital gains tax,” said Rehanyar Khan, general partner at Mumbai-based venture fund Orios Venture Partners.

Currently, there is no capital gains tax on share transactions in listed companies if those stocks are held for 12 months. But shares of unlisted entities face capital gains tax of 20% even after three years.

The same has been reduced to two years as per a recently introduced amendment to the Finance Bill by the government.

The move, believes the investor’s community, is encouraging since it brings down the rate of taxation from 30 to 20% along with other benefits accounting in the rate of inflation, but that does not create much impact.

As per data from VCCEdge, since 2011, the total amount of fund flow to startups from both domestic and global investors across seed and VC deals stands at $919 million and $5,312 million respectively.

Domestic investors are vouching for the fact that while investors in public markets have liquidity available and they can sell off their stake anytime, the sources of capital coming to private companies are long term.

“Even a 10% tax should be questioned. There has to be a better incentive to private investments. If not, at least it should be on par with public markets,” said TC Meenakshisundaram, managing director at IDG Ventures.